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Social Network Revenues Down: Here’s Why


Debra Aho Williamson, Senior Analyst

eMarketer recently revised its 2008 social network ad spending estimates. The change was not just a result of the recession, but was also based on new details about revenue and operations at MySpace and Facebook, the two largest social networks.

MySpace

Because MySpace is part of News Corp., a public company, more is known about its revenues than about other social networks. In News Corp.’s fiscal 2008 (which ended June 30, 2008), Fox Interactive Media (FIM), MySpace’s parent unit, generated $856 million in total revenues.

In fiscal Q1 2009 (ended September 30, 2008), FIM generated $220 million in revenues according to News Corp. financial documents. That means that in the first three quarters of calendar 2008, FIM’s revenues were $655 million.

Why is eMarketer’s current forecast for MySpace US ad spending in 2008 ($585 million) so much lower than the May 2008 forecast ($755 million)? Lackluster revenue growth is one reason. As can be seen in the chart above, revenue growth at FIM has slowed significantly.

Another factor is a change in eMarketer’s model. Previously, we had estimated that MySpace accounted for 80% of FIM revenues. But based on discussions with several industry executives and estimates from Goldman Sachs, eMarketer believes that MySpace now represents 70% of FIM.

Applying that percentage to FIM’s $655 million revenue figure, MySpace’s total revenues through September 2008 were approximately $458 million. Factoring out nonadvertising revenues (which are minimal) and international revenues, eMarketer estimates that US ad spending on MySpace through September 2008 was $425 million. In calendar Q4 2008, eMarketer projects MySpace will garner $160 million in US advertising spending.

Further affecting MySpace in the next few years will be the end of a $900-million deal with search provider Google in 2010. Though the company will likely sign a new search partner, the terms of that deal will be nowhere near as sweet.

In the meantime, MySpace has opened up several new ad revenue streams, including HyperTargeting ads based on members’ profile data and a self-serve targeted ad system aimed at small businesses. Starting in 2009 it will add e-commerce revenues from MySpace Music downloads and other potential e-commerce initiatives.

Facebook

Facebook’s estimated $210 million in US ad spending in 2008 represents a growth rate of 45% over 2007. In a January 2008 conference call with employees, described by the All Things Digital blog, CEO Mark Zuckerberg confirmed that Facebook generated $150 million in total revenues in 2007. eMarketer estimates that nearly all of that revenue came from advertising, and from the US.

In 2008, Facebook had hoped to generate $300 million to $350 million in revenues, a figure that has since been lowered to $250 million to $300 million, according to information published by BusinessWeek in December.

More is becoming known about Facebook’s nonadvertising revenues. For example, the Silicon Alley Insider blog estimated that Facebook’s revenues from virtual gifts (icons and graphic images that members can buy to “send” to a friend) would reach as high as $50 million to $60 million in 2008. Lightspeed Venture Partners, meanwhile, estimated virtual gift revenues at $35 million in 2008.

eMarketer estimates that advertising represents about 85% of Facebook’s total revenues.

Like MySpace, Facebook has continued to expand and rethink its ad offerings, most recently launching video ads that users can leave comments on, as well as branded virtual gifts.

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